What is the role of the World Trade Organisation in managing. the global trading regime? To what extent has the World Trade. since its inception?

Transcription

1 What is the role of the World Trade Organisation in managing the global trading regime? To what extent has the World Trade Organisation been successful in achieving trade liberalisation since its inception? Pádraig Mac Consaidín Introduction Trade and trade regimes have provided some of the most controversial issues in international economic discourse for centuries. While trade as an economic mechanism has existed since prehistoric times, some argue that it was not until the emergence of the nation state, that trade in the international sense or how we understand it today, eventually emerged. These developments also saw the beginning of the trade regime, as societies and the act of trade organised, making the trade regime both a political and economic construct (Barton et al. 2006:29). Developments in economic theory in the eighteenth century provided governments, acting in cooperation, the opportunity to reduce international barriers to trade and enable a state to trade beyond the borders of a national economy. Creating a global trading regime and what many view as a collective good (Barton et al., 2006:29). However, under this system

2 not everybody benefits equally, and as a result it was believed that some form of organisational or institutional framework be placed on the regime, to safeguard trading practices and to seek a more equitable result for all participants. Ultimately, this became the World Trade Organisation (WTO). This paper will examine the role of the WTO in managing the global trading regime by; looking at the organisation s evolution from the General Agreement on Tariffs and Trade (GATT); studying the expansion of the organisation and its responsibilities, before finally offering an opinion on the success of the WTO in achieving economic liberalisation since its inception. A potted history of the global trade regime International trade, related to how we understand the concept today may be mapped to the early modern era of the fifteenth and sixteenth century. With economic nationalism to the fore in the pursuit of generating wealth and building a more powerful state, this mercantile system, as later coined by Adam Smith, saw nations limit imports while promoting exports in an effort to secure a more favourable balance of trade (LaHaye, 2008). By the end of the late eighteenth century however, the concepts of free-trade and the liberal political economy had come to prominence, largely due to Smith s influence through his famous treatise; The Wealth of Nations (Garner et al, 2009:57). Viewed by many as the foundation of modern economic theory, Smith s work heralded the end for mercantilism, which had been the predominant economic philosophy for almost two hundred years (Magnusson, 1994:1-3). Espousing the virtues of economic interdependence, and drawing upon the works of many sages of eighteenth century economic study, Smith believed; in an unregulated international economy, where states could find a productive niche based on absolute

3 advantage (Magnusson, 1994:1-3) (Garner et al, 2009:457). Later, expanding on Smith s philosophies, David Ricardo introduced comparative advantage to the debate, suggesting that nations with no absolute advantage in the production of specific goods, needed to specialise in the production and export of goods they could produce with a relative advantage (Cohn, 2005, cited in Garner et al, 2009:458). So, with economic theory since the eighteenth century championing the reduction of tariffs for most parties, in most situations; gains could be obtained from specialisation based on comparative advantage, allowing countries to trade amongst one another; exporting goods where they held a comparative advantage and importing goods where they held a comparative disadvantage (Narlikar, 2005:2-3). While in theory, such an exchange would benefit the participants involved, in reality, despite a commitment to greater trade liberalisation, a number of countries were reluctant to reduce or remove barriers to trade. Yet, these same countries were not so tardy to raise the same barriers in the interests of self-preservation. One of the most cited examples of this is the United States (US) during the Great Depression (Narlikar, 2005:3). With the adoption of the Smoot-Hawley Tariff Act in 1930, US tariffs increased on average to a level of 60% in what many have branded; one of the great policy debacles of the twentieth century (McDonald et al., 1997:802). What resulted was retaliatory tariff impositions by US trading partners and currency manipulation in order to gain a competitive advantage. Though the Prisoners Dilemma is recognised as a concern in international trade, the cost of retaliation is acknowledged by governments who impose trade restrictions. Nevertheless it does not prevent them from taking such actions. Therefore, from these events it was accepted that cooperation in the area of trade would be difficult without the presence of international institutions to monitor and regulate activity (Narlikar, 2005:3-4). Fate would intervene however; with the onset of World War II (WWII) more critical matters took precedent over

4 the advancement of the trade regime. Post WWII and the creation of a trade regime Discussions surrounding the restoration of the global economic structure post WWII had actually commenced prior to the cessation of the conflict. In the aftermath of the war, with the majority of the developed world in a state of destruction, the United States took the opportunity to embed certain fundamental liberal principles into modern society. One such example was the advocacy of a global free-trade regime, in accordance with the idea that free trade brings benefits to all participants (Baylis and Smith, 2005:196) (Winters, 2004:F4). These actions echoed the sentiments expressed by US Secretary of State Cordell Hull during pre-war trade discussions some years earlier. Where he stated: I have never faltered, and I never will falter, in my belief that enduring peace and the welfare of nations are indissolubly connected with friendliness, fairness, equality and the maximum practicable degree of freedom in international trade. - Cordell Hull (Lehmann, 2010:xxviii) Initially the US and Britain held bilateral trade negotiations, eventually following these up with multilateral talks where a total of fifteen nations were invited to join the deliberations. While a greater concentration of effort was placed on the creation of an International Trade Organisation (ITO), a smaller charter was also being negotiated. Many participants engaged in the negotiations on this charter assuming that the regime s regulations would be renegotiable. At the time, little attention was paid to the stopgap organisational structure, yet despite this, it endured, unlike the ill-fated ITO. And, undergoing little change over the next half century and influencing the trajectory of the trade regime with little renegotiation of the initial principles the General Agreement on Tariffs and Trade (GATT) was established in 1947 (Barton et al., 2006:27). Though a permanent trade organisation was not created until 1994, from 1947 the

5 GATT endured and oversaw many rounds of trade negotiations from its base in Geneva (Baylis and Smith, 2005:329). These negotiations included the enlargement of membership during the Dillon, Kennedy and Tokyo Rounds, and saw successful outcomes on tariff and barrier reduction, especially during the Kennedy Round of , which saw significant progression of the free trade agenda. This included; addressing newer forms of protectionism, extending regulations on anti-trade practices to include sanitary and phytosanitary barriers to trade, technical barriers and non-tariff based barriers. The agreement of these newer rules also allowed for countries to voluntarily sign on for adherence, rather than being enforced on all the contracting parties (Norwood, 1969: ) (Baylis and Smith, 2005:329). Though the GATT was now beginning to operate as a legitimate organisation in its own right, complete with its own budget, personnel and offices. All be they modest in size. However, as time progressed, the GATT was becoming constrained in its work, slow and impotent in resolving trade disputes and the system had begun to become less relevant to the systems of trade and trade barriers in now needed to contend with (Baylis and Smith, 2005:329) (Deese, 2008:73). An era of protectionism in the 1970s further undermined its position, and it was recognised that something more powerful comparable with an institution was required to oversee the global trade regime. Consequently, in the last round of GATT negotiations in Uruguay , the WTO was forged, coming into being on the signing of the WTO Agreement in Marrakesh on 15, April The WTO Agreement annexed a range of multilateral trade agreements into a single package and bound members to the agreement in the trade regime (Matsushita, Schoenbaum, and Mavroidis, 2006, p.7). The agreement further elevated the WTO management of the

6 trade regime to the same legal status as the World Bank and International Monetary Fund, finally giving a stronger institutional presence to implement and monitor existing agreements and negotiate future covenants. Attempting to manage the trade regime The WTO, ushered in with great fanfare and much hope, was to be the legitimate multilateral institution with formal legal status, rules, and mechanisms for binding dispute settlement in the area of global trade. An organisation that did not just cover trade in goods, but had a wider agenda, encompassing; services, intellectual property, investment, unfair trade practices, merchandise trade as well as other economic considerations (Barton et al., 2006:1) (Baylis and Smith, 2005:601). The WTO s remit was to also ensure that countries were no longer selective in choosing what parts of trade deals they implemented. It was acknowledged that negotiated trade agreements needed to be implemented in full, with the power to impose sanctions made available to the WTO for those who did not adhere to the rules. This was also as a result of the requirement for unanimity in the decision making process on general principles. In this circumstances, where a majority decision creates an international obligation, all members, regardless of provision of their domestic legislation are required to adhere to the agreement (Barton et al., 2006:49). This is a significant detail, when one considers that the WTO has 157 members (WTO, 2012a), but also possibly, even probably, why no trade deal was reached from 2000 to Unanimity amongst that many members proves difficult to say the least. The composition of members is also worth observing, 75 per cent of members are developing nations; this is noteworthy as trade liberalisation is an integral part of growing a developing countries economy (Krueger, 1998, p.1515).

7 The clear benefits of trade liberalisation rest in the fact that through the process, industry competitiveness can be more effective by allowing businesses to engage in targeting and selectivity, thus making a particular industry more viable where it has a competitive advantage. An example of this would be the Brazilian aerospace industry which has seen exponential growth since the adaptation of the Brazilian economy, an emerging and developing economy, to liberal trade practices (Shafaeddin, 2005:12). Also, countries that embrace trade liberalisation and outward orientation in their economies perform better than those who still show traits of the mercantile past (Singer, 1988:233). It is worth considering however, that this move to liberalisation can and should only be achieved incrementally, in the interests of stability, especially for developing nations. This is where the WTO assists in the transition from fledgling economy to free trade partner in the global economy. Therefore, the logic, and indeed benefits, in moving toward a liberal trade agenda would seem uncomplicated. In practice, this is not always the case. This balance of developing nations versus developed nations as noted earlier, could lead one to suspect there would be a power shift towards these developing countries, but this had not occurred to any significant extent, to date (Barton et al., 2006:49). One possible reason for this could be the disproportionate influence larger countries have in the WTO, due to the depth of resources at their disposal such as lobbyists, delegates and researches, in comparison with developing nations who are less well-resourced and experienced in the complex political negotiations that take place. However, there have been some developments in recent months that give cause for optimism for developing countries. The Bali accord, struck in December 2013, has been seen as the most significant agreement struck since the WTO s founding in 1995 in the opinion of some. A package of deals, including pledges to limit agricultural subsidies, with additional

8 policies to help the least developing countries has been agreed. While the Doha round of negotiations had been faltering in recent times, this agreement has been welcomed as an opportunity to progress the Doha agenda, which for a period remained stagnant. Giving the least developing countries (LDCs) preferential treatment and market access, it is hoped to advance their progress and in the long run produce a viable trading partner within the WTO. This agreement is particularly significant for the BRICS 1, with India specifically leading the way in the negotiations by adopting a stance on food subsidies for the poor. The Indian Minister for Commerce and Industry stated that in the talks, for his country; food was nonnegotiable. India s hard-line stance on the issue was backed by China, which is believed to have been a principal reason for the success of the Indian initiative, promoting the BRICS as victors in the negotiations (The Express Tribune, 2013) (The BRICS Post). The undue influence of larger nations may be traced back to the GATT era of the 1960s. While attempting to pursue policies a majority, if not all members would subscribe to, by the mid-1960s a second type of informal decision making system had developed. The GATT agenda began to be set by a dialogue between the U.S. and EU primarily, similar to the bilateral discussions that had taken place toward the end of WWII and immediately after the war. This select group continued to meet and direct decision making on global trade issues in a process known as the concentric circle model of decision making, with the decision makers forming what became known as the illustrious Green Room (Barton et al., 2006:51-52). This arrangement led to discontent amongst other members which eventually came to the fore in 1999 at a WTO ministerial meeting. With almost half a million people protested against the organisation on the streets of 1 An acronym for the five major emerging economies; Brazil, Russia, India, China and South Africa

9 Seattle in what became known as the Battle for Seattle (Garner et al, 2009:457); within the WTO another battle was being waged. A number of smaller nations reportedly stormed one of the informal Green Room meetings demanding representation at the table (Barton et al., 2006:52). The WTO, while egalitarian in principle, seems less so in practice. The disparity amongst members which led to the internal confrontation in 1999, has also been recognised and conceded to by the perceived more powerful members (Subramanian and Wei, 2007). Indeed, US trade representative Charlene Barshefsky admitted (Steger, 2005, p.81): The process, including even at Singapore as recently as three years ago [1996 WTO ministerial meeting], was a rather exclusionary one. All meetings were held between 20 and 30 key countries. This led to an extra ordinary bad feeling that they [smaller countries] were left out of the process and that the results even at Singapore had been dictated to them by 25 or 30 privileged countries that were in the room. This practice seems at odds with the principles of the WTO, as set out by the organisation itself, where it promotes: trade without discrimination, treating people equally, freer trade through negotiation (WTO, 2012b). Therefore, is if fair to argue that the organisation is unwilling to adhere to its own principles, or, like the GATT is a failure to evolve in the face of new challenges and greater membership, particularly from developing nations, creating a strain the organisation finds it difficult to operate under. Stagnation in recent trade talks make answering this question difficult, yet pose others in relation to the capability of the organisation in the new century (Bown, 2004), despite the successes of Bali. The WTO s success in achieving trade liberalisation

10 If it is accepted that trade liberalisation is concerned with easing state-imposed restraints, if not endeavouring to dispense with them entirely (Garner et al, 2009:471); then trends through the twentieth century point to successful trade liberalisation globally. The global economy has witnessed significant opening of borders to trade during the twentieth century, for example, tariffs on manufactures in countries of the north have seen rapid decline (Baylis and Smith, 2005:603). Since the creation of the GATT tariffs have fallen from approximately 13 per cent in 1947 to just over 4 per cent by 2007 (see Figure 1, WTO, 2011:22). Indeed trade tariffs in most industrialised countries now stand at only 5% (WTO, 2012c). Added to this, cross border trade has increased by 6 per cent per annum annually between 1950 and 1994, encouraged by liberalisation policies at national and regional level, such as international trade agreements facilitated by the GATT and subsequently the WTO (Baylis and Smith, 2005:603). Entering the twenty-first century, the global trade regime has seen more on electronic commerce than ever before, a new challenge for the WTO. Technological advances mean today s global consumer can shop the world using technology held in the palm of their hand. Trade in goods, services and on the financial markets is now done more easily and accounts

11 for most of the exponential growth in global trade (Baylis and Smith, 2005:608). Recognising this, the WTO has facilitated the evolution of electronic commerce, a new form of trade liberalisation, by ensuring members to not impose duties on electronic transmissions (WTO, 2012d). Though an extension of previous initiatives under the GATT it is an example of ensuring trade liberalisation in the electronic age (Dunkley, 2000: ). Challenges lay ahead for the WTO in this regard though, specifically in relation to investment trade, where in the global economy, investment liberalisation is essential for economic efficiency (Ruggiero, 1995) (Bergsten, 1996). There has not been a progressive consensus on this matter as yet, with uniform agreement across members guaranteed to be a difficult feat. In doing so, the WTO is facilitating further global trade liberalisation, indicating that the organisation has therefore been successful in creating a freer global trading regime. It should be pointed out, that the successes in trade liberalisation have come from the GATT, which ultimately provided the wider mandate for the WTO. Conversely, it must also be acknowledged that since trade barriers have been prohibited, countries are developing new and imaginative ways of protectionism and promotion of the national trade agenda. Allegations of currency manipulation by China in an effort to enhance the competitiveness of exports for instance is an example or such practices. Though such breaches of monetary policies may be more of an issue for the International Monetary Fund, technically, the WTO do also have a vested interest in the matter and should also act (Hoekman and Kostecki, 2009:664). One may argue, that in the context of one of the greatest global financial crises ever experienced, it could be said that the success of the WTO is in the fact that they have maintained existing agreements, despite a lack of progress in the Doha Round of

12 negotiations. Maintaining existing agreements is in itself is a success, when as eluded to earlier, when the Great Depression hit in the early twentieth century, the temptation to resort to policies of a nationalist persuasion proved too much for some. Perhaps the critics of the WTO should bear this in mind when voicing criticism of the organisation. Thought enduring a period of stagnation in trade talks, maintenance of existing pacts in the face of significant adversity is no mean feat. Conclusion Simply put, the WTO is concerned with the rules of trade between nations at global and nearglobal level (WTO, 2012e). The organisation carries out its role in the global trade regime by using trade agreements; acting as a forum for trade negotiations; handling trade disputes; monitoring national trade policies and assisting developing countries. As membership covers most of the globe, these nations, bound by WTO trade rules and agreements illustrate the significant role the WTO plays in managing the global trading regime. While some may criticise the way in which policy is formulated at the WTO, taking a top-down approach from a number of privileged countries. There can be little argument as to the influence the organisation has on the global trading regime. While many trade agreements occur at regional level, they are overseen by the WTO. Its success in managing a trade liberalisation of the global regime, as illustrated above, further points to the role the organisation has played in global trade and the creation of the trading regime as we know it, building on the work of the GATT. Challenges the organisation must face in the coming years however is to build on the 2013 Bali agreement, the first meaningful agreement in a number of years. Address the

13 pressing environmental agenda and find greater ways of bringing developing countries into the decision making process in a meaningful way; to alleviate concerns in relation to a democratic deficit within the organisation. Despite provisions made for developing countries in the Bali agreement, developing countries need to be given a greater role at the negotiation table, not simply appeased by their more powerful colleagues in decisions made about them, without their input. Perhaps once the dust settles on the current financial crisis, new impetus for progress with the WTO steering the agenda may be possible. Until then, upholding the existing liberal free trade regime must remain the task of the WTO. List of References Barton, J.H., Goldstein, J.L., Josling, T.E. and Steinberg, R.H. (2006), The Evolution of the Trade Regime, New Jersey: Princeton University Press. Baylis, J. and Smith, S. (2005), The Globalization of World Politics, 3 rd edn. New York: Oxford University Press. Bergsten, F. (1996), Globalising Free Trade, Foreign Affairs, 75(3), pp Bown, C. (2004), Developing Countries as Plaintiffs and Defendants in GATT/WTO Trade Disputes, The World Economy, 27(1), pp

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